Actually, Raising the Medicare Age is Also a Good Idea

Since Senator Lieberman proposed a package of Medicare reforms last week, he has come under attack, particularly for his proposal to increase the Medicare retirement age from 65 to 67 by 2025. Matt Yglesias said that this idea "really fails to put the Medicare issue in the proper context," Kevin Drum calls it "an egregiously punitive policy," and Paul Krugman says it is "an idea that’s so bad, so wrongheaded, that you’re almost grateful."

The focus of any Medicare changes should be on slowing health care cost growth, not changing eligibility

Raising the Medicare Age will not actually save money -- or not much money

Raising the Medicare Age will throw many seniors into the ranks of the uninsured

Critics are wrong on all three accounts, which we will address in order.

1. We have a health care cost AND aging problem

One criticism of raising the Medicare age is that it does not focus on actually slowing per-person health care cost growth -- with cost-growth being the primary driver of growing Medicare costs. As Kevin Drum writes, "Lieberman's plan reduces the level of Medicare spending, but it does nothing to address growth rates. That's backwards. If healthcare costs keep growing at the same rate they're growing now, it swamps everything else."

Of course, controlling health care cost growth is incredibly important, and we strongly support policies which can "bend the cost curve". Senator Lieberman's plan includes a couple of these policies -- reforming cost-sharing rules and restricting Medigap plans -- but he could and should go further (for example, by supporting tort reform or changes to pay providers based on performance). But it is worth remembering that Medicare grows for two reasons -- health care growth and population aging. More than a third of the projected growth in Medicare and Medicaid is due to population aging, rather than health care cost growth.

Drivers of Increased Medicare and Medicaid Spending

2035

2080

Aging

Health Care Cost Growth

Aging

Health Care Cost Growth

44%

56%

30%

70%

According to CBO, even if per capital health care cost growth were limited to GDP -- a highly unlikely outcome -- federal health spending would still increase from 5.5 percent of GDP in 2010 to 8.7 percent by 2030. To be sure, this would be a major improvement over the 10.9 percent of GDP currently projected, but it would represent substantial growth none-the-less.

Given that this 3 percent of GDP increase is driven by population aging, it is quite sensible to address at least a portion of it by increasing the Medicare eligibility age.

(As for Drum's concern that raising the age only reduces the "level" of spending, we'd strongly support building on Senator Lieberman's proposal by permanently indexing the Medicare age to longevity once it hits 67).

2. Raising the Medicare age will save the government $125 billionthrough 2021 alone

Another criticism of raising the Medicare age is that it either won't save the federal government (much) money or it won't reduce (and in fact will increase) overall health spending. On the first count, Yglesias says that "actual savings here are kind of surprisingly low" and Drum says that the policy "might raise Medicare costs."

We don't have time to fully address the methodological flaws in the studies these two are citing, but it should be sufficient to show that the Congressional Budget Office believes Lieberman's proposal would substantially reduce the deficit. Over the next decade, in fact, CBO projects the not-fully-phased-in age increase would save $125 billion. By 2035, they project Medicare spending would be about 0.3 percent of GDP lower as a result of the two-year increase in the eligibility age.

Paul Krugman has a more nuanced criticism: that while raising the Medicare age might save the government money, it will actually increase the total cost of health care. "While it’s true that Medicare has done an inadequate job of controlling costs," he writes, "the private sector has done much worse. And if we deny Medicare to 65- and 66-year-olds, we’ll be forcing them to get private insurance — if they can — that will cost much more than it would have cost to provide the same coverage through Medicare."

Krugman could be right on this front. What happens to overall health care costs if the Medicare age is raised will depend on how well the new health care law works in implementing low-cost exchanges and keeping Medicaid costs down (Krugman makes it clear that he has little faith in this law, despite his support of it). Importantly, though, the purpose of raising the Medicare age isn't to reduce overall health care costs; it is to allocate limited federal dollars efficiently. We'll discuss this more later in the post.

3. Raising the Medicare age will have only a small effect on the number of uninsured people

The final criticism of raising the Medicare age is that it would leave those age 65-67 uninsured. Krugman argues that "not every 65- or 66-year-old denied Medicare would be able to get private coverage — in fact, many would find themselves uninsured." Drum is more emphatic, claiming that "it's flatly impossible for anyone that age to get private insurance, so they either keep working or they go without health insurance."

These claims show not only a failure to look at the statistics, but more importantly a failure to remember the health care reform legislation which both critics support and which will provide near-universal coverage beginning in 2014.

Statistically, as it turns out, older Americans are among the least likely to be uninsured. In 2009, 22.5 percent of adults under 65 were uninsured -- but only 14 percent of those age 55 to 64 were. And those in their early 60s are less likely to be uninsured than those in their late 50s. So even currently, claims that it is impossible to find insurance at older ages are at best exaggerated.

[chart:4463]

But all this forgets about the health care reform legislation (PPACA), which provides Medicaid coverage for those making less than 138 percent of the poverty line and progressive subsidies for those making up to 400 percent of the poverty line. Even individuals making over 400 percent of the poverty line -- where the uninsured rate for those aged 55-64 is a whopping 4 percent -- still have the ability to purchase insurance on exchanges which have "guarantee issue" (purchasers cannot be denied coverage) and limited age rating (premiums for older purchasers cannot be more than three times as big as younger purchasers).

In other words, increasing the Medicare age won't cause most people to be uninsured; instead, it will push them into the insurance exchanges.

The Benefits of Increasing the Medicare Age

Criticisms of raising the Medicare age are not only off base, but they obscure the two major benefits of such a policy. First, as suggested above, raising the age will lead to much better targeting of limited government resources.

Currently, pretty much everyone over age 65* receives the same effective insurance subsidy from the government -- regardless of age or income. But Medicare's costs are rising to unaffordable levels, and will have to be cut. Rather than reducing benefits across-the-board, raising the Medicare age does so in a very targeted way. For one, all reductions are targeted at the youngest of the Medicare population -- those who tend to be in the best health and are most able to work. And as we explain above, it is not as if they would be thrown to the dogs. The lowest income individuals would continue to receive free heath care through Medicaid. Those of more moderate income would receive subsidized health care in the health exchanges, with subsidies linked directly to income. And even those of higher incomes would still benefit from many of the coverage provisions under health reform.

In addition to better targeting Medicare, increasing the age would have positive labor market effects. Many people make their retirement decisions based upon the Medicare eligibility age, and increasing it would likely encourage longer working lives. As we've explained in the past, longer working lives would accelerate economic growth, increase revenue collection, and improve overall retirement security.